Inter-industry trade in manufactures: Does country size matter?

The purpose of this paper is to examine the relationship between the size of a country and the characteristics of the goods it produces and trades. In a general equilibrium model with two countries which only differ in size, there are two imperfectly competitive industries which can differ in terms of factor intensites, trade costs and demand elasticities. The 'market access' effect attracts firms to the large country to save on transport costs; and the 'production cost' effect attracts firms to the small country due to lower wages. The tension between these effects determines the pattern of specialisation and trade. (C) 1998 Elsevier Science B.V.